liquid funds are debt mutual funds. they invest in short-term instruments. treasury bills. commercial paper. certificates of deposit. maturities up to 91 days .
tax treatment depends on purchase date. rules changed in 2023. changed again in 2024. finance bill 2024 revised the definition of “specified mutual fund” under section 50aa. from fy 2025-26 onwards, it narrowed strictly to debt-oriented mutual funds that invest more than 65% in debt and money market instruments .
for investments made on or after april 1, 2023
finance act 2023 brought section 50aa. changed tax for specified mutual funds. liquid funds fall here .
any gains from units bought on or after april 1, 2023 are short-term capital gains. does not matter how long held. 10 days or 10 years. same .
gains added to total income. taxed at slab rate. no indexation. no ltcg rate .
someone in 30% bracket pays 30% plus cess. someone in 5% bracket pays 5%. the new rule works better for lower-slab investors. earlier they paid 20% flat on long-term gains. now they pay their slab rate .
for investments made before april 1, 2023
older investments follow different rules .
held 24 months or less. short-term capital gains. taxed at slab rate.
held more than 24 months. long-term capital gains. taxed at 12.5%. no indexation .
units sold before july 23, 2024 had different rules. 36 months holding. 20% with indexation. that does not apply to redemptions in 2026 .
tax on liquid funds (fy 2026-27)
| purchase date | holding period | tax rate | indexation |
|---|---|---|---|
| before april 1, 2023 | 24 months or less | slab rate | no |
| before april 1, 2023 | more than 24 months | 12.5% | no |
| on or after april 1, 2023 | any period | slab rate | no |
dividend taxation
dividends from liquid funds added to income. taxed at slab rate. dividend distribution tax abolished from april 1, 2020 .
tds at 10% under section 194k. applies if total dividend exceeds ₹5,000 in a financial year. no tds if form 15g or 15h submitted .
for non-residents. tds is 20% under section 196a. ₹5,000 threshold does not apply .
what this means for investors in 2026
new investments after april 1, 2023 are less tax-efficient. tax advantage over fixed deposits has narrowed. both taxed at slab rate .
fixed deposits taxed on accrual basis. liquid fund gains taxed only on redemption. that remains a small advantage .
for pre-april 2023 investments. 12.5% ltcg rate available. only if held over 24 months. consider holding periods before redemption.
tax laws may change. budgets can introduce new amendments. checking the latest rates and provisions before filing or investing is advisable .
frequently asked questions
1. are liquid funds taxed at slab rate in 2026
yes. for purchases on or after april 1, 2023. all gains are short-term. taxed at slab rate .
2. do liquid funds have indexation benefit in 2026
no. indexation is not available for any liquid fund redemption. pre-april 2023 funds get 12.5% ltcg. no indexation .
3. what is the ltcg rate on liquid funds for 2026
for pre-april 2023 funds held over 24 months. 12.5% flat rate. no indexation .
4. is tds deducted on liquid fund redemptions
no. tds is not deducted on capital gains from mutual funds for resident investors .
5. how is dividend from liquid funds taxed in 2026
added to income. taxed at slab rate. tds applies if dividend exceeds ₹5,000 .
